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What does a Tory or Labour government mean for markets?

UK equity markets have hit new highs since the Conservative party announced back in late April that it would hold a surprise election.

With the vote only one day away and the result likely to be much closer than many expected, markets could find themselves in the spotlight come Friday.

So what would a win for the two leading parties mean for markets? Below, Paul Mumford, manager of the Cavendish Opportunities funds at Cavendish Asset Management, and Jupiter Asset Management’s Alastair Gunn and Rhys Petheram (managers of the Jupiter Distribution fund) analyse the possible outcomes.

Conservative win

Mumford

“From an investor point of view, victory for Theresa May would be ideal as it would give the government a firm mandate, and put it on steadier, more solid ground as we head into what will likely be protracted and difficult Brexit negotiations.

“A stronger government could also boost the pound's fortunes. While the inevitable sterling fall post-referendum has been useful for exporters, the eurozone continues to look wobbly and there is every reason to expect sterling to regain ground thanks to its safe haven status over the mid-term. This would help domestic businesses, although of course it will hurt exporters on the flip-side.”

Gunn and Petheram

“Sterling is having a tough time as polling day draws closer. Amid evidence the Conservative lead over Labour is shrinking, the fall in the pound reflects concern Theresa May may not quite achieve the overwhelming majority she needs to play a strong hand in the Brexit negotiations.

“That said, it still appears the Conservatives are likely to find themselves with a bigger majority than the one they had previously. Markets, in our view, will react positively to the news, and sterling should strengthen a little.

“The knock-on effect, from a stock perspective, might be a modest rally in the shares of companies that do most of their business here in the UK. The post-Brexit decline in the pound has raised the cost of imported raw materials many of these companies need to produce the goods they sell to us, and there has been pressure to pass on these higher costs to the final customer.”

“A rising pound might shield the UK consumer from these rises at a time when incomes are seeing a real squeeze. We would caution, though, that the pound’s gains may be modest - no more than a 1-2% rise on a 50 plus majority for the Conservatives, and perhaps 3-4% if it is a more decisive win.

“Then again, it is important to remember that weak sterling has been a boon for UK-headquartered multinationals like Unilever where overseas earnings earned in euros or US dollars, have boosted balance sheets due to the favourable exchange rate.”

Labour win

Mumford

“A Labour victory or a Labour/SNP/Liberal coalition would create worries about higher taxes. A hike in corporation tax would have a negative effect on company earnings and sentiment, while a rise in personal taxation would send out a negative signal for companies seeking expansion in the UK.

“Brexit negotiations would be jeopardised by the weaker stance. The prospect of Scottish Independence would re-emerge, and government debt would increase, as might interest rates.

“The split in the Labour Party over its leadership would be a concern, and sterling would then decline further, but at least this would benefit the majority of FTSE 100 companies which have overseas earnings.”

Gunn and Petheram

“In the event of a Labour party victory, we could see a “Trump effect” where the likelihood of increased government spending takes pressure off the Bank of England, pushing short interest rates higher on the expectation benchmark interest rates will also start moving up sooner than initially thought. Such a move would likely strengthen sterling.

“As a counterbalance, potential inflationary pressures linked to Corbyn’s policies, and general uncertainty on how a Labour government might proceed, would likely weigh.”